Performance Manifesto

As the world of advertising shifts from a cost-per-thousand-impressions (CPM) model to a cost-per-action (CPA) one, many classically trained marketers are having a hard time adjusting. The old rules don’t apply. In fact, the entire dynamic has changed.

So, to help you make sense of it all, I’ve written a brief Performance Manifesto. Here are its top three tenets:

Less Risk Means Less Control

In the world of frequency and reach advertising — otherwise known as CPM — advertisers paid for control: the message, placement, timing, and audience. Very simply, CPM advertisers planned a campaign, signed some insertion orders, and then sat back — and waited. Sometimes orders came in; sometimes they didn’t. Regardless, CPM advertisers controlled everything — except results.

But performance advertising is different. Advertisers control only one thing: acquisition costs. Advertisers set the price they are willing to pay for certain activities: clicks, leads, downloads, registrations, sales, or whatever. But under the performance paradigm, that’s all advertisers control. Instead, publishers — not advertisers — decide the final message, placement, timing, and audience.

The more control an advertiser wants, the more risk he must bear — in the form of CPM-based spending. The less risk an advertiser wants — in the form of CPA-based spending — the less control he can have.

Effective CPC Is the Metric

I’m going to risk a month of flame mail by making the following categorical statement: Effective CPC (EPC) is the best, most important metric for your success as a CPA marketer. To calculate EPC, simply divide your performance-marketing spend by total clicks.

Consider the data in the chart I’ve provided. If you are a publisher, which advertiser would you want on your site? If it’s a performance deal, naturally you’d want the one with the highest effective CPC.

Advertiser #1
Advertiser #2
Advertiser #3
Clicks
1,000
1,000
1,000
Shopping Sessions
400
600
800
Purchases
10
18
34
Effective CPC
$0.40
$0.72
$1.36

For advertisers, this introduces a whole new dimension. There are several hurdle rates that CPA requires. First, there is a basic market-clearing rate. If you can’t produce an EPC above the market rate, your days as a performance advertiser are numbered. In fact, an EPC below the market rate will get shut out — no pixel space.

Next, advertisers face a new kind of competition. For example, imagine that all three advertisers listed in the table above are bookstore competitors. Never mind that Advertiser 1 has an EPC well above the market-clearing rate; it will still find itself relegated to tertiary pixel space as publishers migrate to the higher EPC offers from Advertisers 2 and 3.

Moreover, advertisers not only need to compete within their category (in this example, books), but with all other advertisers. This is a battle for pixel space. It is not all that different from the battle for shelf space that is waged at your local grocery store. The products at eye level (or above the fold) are the products that have the great SKU (stock-keeping unit) velocity and best margins. It is pure capitalism.

Unit Costs Increase With Volume

During the Industrial Revolution, the unit price of widgets went down as the quantity produced increased. This was a result of generally high fixed costs (e.g., the factory) and nominal variable costs (e.g., widget supplies). But we’re not in factories anymore.

On the Web, the paradigm is reversed. Solving for price is easy. Consider that more than 5,000 merchants now have an affiliate program. Affiliate programs implicitly solve for price. Many of these programs saw a steep ramp. Euphoria set in, and affiliate marketing was great.

Then affiliate marketers hit a wall. Solving for quantity (at a specified price) is hard. Now, go back to the table above for a minute. Guess what? All three columns are actually the same advertiser. And it’s actually paying the same amount on a per-sale basis. Meanwhile, after two rounds of Web site optimization, its partners have seen EPC grow from $0.40 (Column 1) to $1.36 (Column 3).

In a Nutshell

This is the part most people have a hard time understanding. It doesn’t cost the advertiser any more to pay a $1.36 EPC than it does for Advertiser 1 to pay a $0.40 EPC because EPC is a calculated measure. In this case, the advertiser paid a flat bounty per sale that was consistent across all three redesigns.

What forced this advertiser to optimize her site was a hunger for more traffic. After a while, at $0.40, she was consuming all the inventory she could get — at that price. To get more pixel space, she needed better conversion metrics. The process repeated after a while at $0.72.

The performance age is only just beginning. Those who succeed will recognize early and often that their ability to command pixel space is directly tied to their ability to monetize it. Those advertisers who learn how to manage publisher relationships in an era of diminished control and focus on constantly improving their EPC while expecting to pay up for volume stand to gain the most ground.

As always, I welcome your emails.

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